Expanded EITC May Offer New Lessons in Labor Economics

The earned income tax credit is still one of the few government social welfare programs that is popular with both Democrats and Republicans. Rubio is working on legislation in the Senate to alter the program but leave its basic structure intact.

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Rubio’s legislation is expected to spread the tax credit throughout the year.

An earlier paper by Eissa and Jeffrey Liebman found the 1986 expansion of the EITC caused single women with children to increase their labor force participation but had no effect on the hours worked of single women with children who were already in the workforce.

Ryan’s report on the War on Poverty did not directly address this phenomenon. But administration officials have recently been highlighting those findings when talking about other government programs, such as the 2010 health care law.

Administration officials have been casting doubt on recent CBO findings that the law will reduce labor force participation by the equivalent of up to 2.5 million workers in 2024.

“The best economic research is where people look at actual behavior,” Sperling said recently. “In the earned income tax credit, they found that people don’t make those kind of precise trade-offs because they’re not just acting like these purely rational economic actors with 100 percent information. They’re real, live parents who are struggling to provide security for their family, and they’re going to keep working harder and looking to do well because they want to do better for themselves and their family.”

Despite the findings of researchers, there is reason to believe that Ryan’s “poverty trap” may be a real concern, said Elaine Maag, a senior research associate at the Tax Poverty Center.

Many of the EITC studies have focused solely on the effects of phasing out the credit. What happens to people’s labor participation when all tax and transfer programs are phased out simultaneously remains unknown. It may be that people are willing to keep working despite losing their EITC benefits, but taking away other assistance programs such as food stamps at the same time may undercut their willingness to work more hours.

“If you look at the EITC, you’re losing a little bit of money — either 19 cents or 21 cents for each dollar of additional earnings —when you’re in that phase out,” Maag said. “But if you’re also earning food stamps when you’re in that phase out, you might be losing 70 cents altogether.

“We don’t really know how many people are in that situation of losing all their benefits at once,” she added. “That’s definitely the next phase of the research.”